Hands leads the way

Terra Firma’s first Walker-compliant annual review sets out a blueprint for mega-fund disclosure, reporting on all its portfolio companies irrespective of size or location. Guy Hands may conduct more of his business outside the UK as a result of changes to tax.

Guy Hands’ Terra Firma has gone far beyond the minimum requirement for disclosure in its first Walker-compliant annual review of its activities.

Under Sir David Walker’s recommendations on transparency and disclosure in private equity, Terra Firma would have had to report on three of its eight portfolio companies, according to original research by PrivateEquityOnline.com.

The much-vaunted transparency initiative drawn up by the ex-Morgan Stanley chairman limited the reach of its voluntary guidelines to companies with 50 percent of their revenues in the UK and 1000 UK employees. Companies bought in non-public to private bids with an enterprise value of more than £500 million (€660 million; $992.9 million) will be expected to comply; while companies bought in take-private bids should have a market capitalisation of £300 million.

EMI, the UK music business, Odeon/UCI, the cinema chain, and Annington, a property company, were the only businesses to meet the criteria for disclosure.

Guy Hands: “nothing
to hide”

Hands said: “The simple truth is we have nothing to hide. Private equity should not be clouded in secrecy, but explained… This role as a catalyst for change is private equity’s most useful economic and social function. We believe that only when firms become open and transparent will people appreciate this.”

The firm has put money where its mouth is investing “approximately €325,000 and around 2,000 hours in making information on Terra Firma and its businesses more accessible”. The cost in time and money underlines why smaller firms were keen to stay ouside of the scope of Walker’s report and why other firms will be frustrated to see Hands widen Terra Firma’s reporting to include its entire portfolio.

But if the report shines a light on Terra Firma’s activity, Hands also used it to highlight his business’s concern at the recent changes to UK tax law: “Taxing long-term capital gains more like annual income will encourage businesses to be less long term in their approach.” He warned: “Such trends in UK taxation, making the UK a less competitive financial centre than it was, have caused us to review our UK activities and may result in future growth being pursued through our other European offices.”

[UK tax changes] may result in future growth being pursued through our other European offices.

Guy Hands

He said this would please a number of staff that are already foreign nationals and who have already expressed a desire to be located outside the UK. Currently Terra Firma staff based in the UK pay UK taxes, he said. It paid its senior management of 15 an average of £665,053 or a total of £8,978,216 in salaries and bonuses in 2007.

The Terra Firma team is made up of 100 people from 20 countries speaking 29 languages. A spokesman said Hands’ firm would stay in the UK and continue to be a UK private equity firm.

It paid £15.2 million in corporation tax, income tax and national insurance to the UK Treasury on income of £46 million and profits of £3 million. More than £200 million of interest was paid by Terra Firma’s UK businesses to UK banks in the year and they paid £78 million to advisors based in the UK.

Hands was candid about the industry’s prospects in the light of the credit crisis: “Private equity firms are … facing a very tough environment not only in terms of executing new deals, but also with regards to the performance of those businesses which they already own.”

As a result he said “the investment performance for the asset class of private equity as a whole will suffer considerably over the course of the next two years as the current difficult markets take their toll.”